Credit, collections & insolvency news

The original protocol was cobbled together in a rush by the Supreme Court Rules Committee under pressure from consumer groups to do something about heavy-handed tactics on the part of debt purchase companies, particularly in the world of energy and mobile phone debts.There was no consultation with the credit industry and, as a result, the first protocol was badly drafted and badly received.As an afterthought, the Rules Committee decided to consult the credit industry and the revised protocol appeared, which became effective on 1st October 2017.

What does the protocol say?

It requires any business creditor who wishes to recover a debt from an individual (including business debts) to send a detailed letter enclosing a response pack for completion and return within 30 days.If the debtor responds by asking for more information, a further 30 days must pass from the date when that information is supplied before proceedings can be issued.

Although the aim of the protocol was to provide more information to debtors to enable them to understand the nature of the debt and (if necessary) to request more information prior to the commencement of court proceedings, it is doubtful that this outcome has been achieved.

We act for a number of business clients, including energy companies, and send out thousands of protocol letters.We get responses from about 10% of them at most.A small proportion of these contain settlement offers.The obligatory statement of means is rarely completed to enable that offer to be assessed fairly.Most of those who respond take the opportunity to tick all the boxes, including the one saying that the debt is disputed and the one asking for further information, to buy more time – very much as was predicted before the protocol came into effect.

After receiving further information, those debtors rarely make a settlement offer.Consequently, the outcome is that the commencement of the inevitable court proceedings has been delayed by more than two months on top of the creditor’s own credit cycle.

Our experience is that debtors responded more promptly prior to the introduction of the protocol when they received a seven-day letter.This instilled a greater sense of urgency.Of course, in most cases, that seven-day letter was the last step in an exhaustive credit control process and full information about the debt had already been supplied.

Now they receive a voluminous pack of documents, which acts as a deterrent for many people, accompanied by a letter allowing them a thirty-day breathing space which permits – and encourages – them to leave a response until the last minute and, by its tick box response, invites a dispute where none exists.

How does this affect creditors?

The protocol applies only to debtors who are individuals, but this includes sole traders as well as consumers.Many of those debts will be business debts.The impact of the protocol on small businesses has been profound.The Federation for Small Businesses has commented that the UK’s poor payment culture is crippling many small firms and that Government action is needed to save 50,000 businesses every year from collapse.

The protocol promotes the wrong debtor behaviour and adds to the problems faced by small businesses by, in effect, granting an additional sixty-day credit period beyond the creditor’s own credit period.As we have seen, proceedings still have to be issued in the vast majority of cases, so the protocol is merely delaying the inevitable.

The law of unintended consequences applies to the protocol, which has proved to be of no benefit to debtors, as far as we can see, and is significantly detrimental to business, in particular, small businesses and the self-employed, who supply goods and services to individuals.

How can it be improved?

A distinction should be drawn between consumer debt and business debt.Although the aim of protecting consumers was laudable, the protocol has drawn in a large number of business debtors.

The thirty day period is excessive and should be reduced to 14 days.There is no good reason for allowing such a long time simply to complete a tick box form and send it back.Most claims are simple invoice dent claims and do not require a detailed consideration of lengthy contract documents or legal advice.

The failure to respond to a protocol letter should have consequences for the debtor (as the other side of the coin to the protection that it offers).Additional costs should be payable by the debtor in those circumstances if proceedings are subsequently issued and become defended, or if an application to set aside judgment is made.The debtor should not be allowed several bites at the cherry – at the expense of the business creditor who is struggling to remain solvent.